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Partner protections, Buy/Sell Insurance

Partnership protection


Does your business have a formal buy/sell agreement covering succession plans for your business in the event one of the partners’ death, disability or critical illness? A Partnership Protection strategy ensures the exiting owner receives true business value after tax.


If you have a business partner/s, and you do not have a written agreement covering succession plans for your business, then quite simply your business is at risk. With no written agreement, it’s highly likely that the estate of the deceased will receive the shareholding of the business.


A written agreement between partners is essential. This type of agreement can establish what occurs if a business partner is disabled, can no longer work or passes away.

Provides a cash lump sum that can be used by your business to:
  • Fund a buy / sell agreement documenting an agreed price (business will).

  • Guarantees the orderly, equitable and certain transfer of ownership.

  • Maintains control of the business for the future.

  • Protects their entitlement to profits and the value of the business.

  • Ensures the exiting owner receive fair value for their interest.


Tax treatment

Partnership protection benefits are free of tax and the payments can be used to provide funding for the buy/sell agreement.

How much life cover should I have?


The sum assured under a shareholder or partnership protection policy should reflect the value of the partner or director's interest in the business. 


This would need to be regularly reviewed to take into account any changes in this value.

Who is the policy owner?


It is very important that the choice of policy owner is decided in consultation with taxation and legal advice.  This is because the ownership an insurance policy has significant implications for the type and amount of tax that will be paid if the policy is paid out.


Below we have summarised some of the considerations for ownership of the insurance.


  • Each principal owns the policy on their own life. 

  • In the event of death or total and permanent disablement the policy proceeds are received in exchange for their share of the business as per the buy/sell agreement. 

The benefits of this type of ownership are:

  • It is straightforward and simple.

  • The policy is fully transportable; therefore if a principal leaves the business for reasons other than death or illness, such as a business sale, they can retain the policy.

  • If the business structure changes it can be easily modified.

Issues with self ownership:

  • If there is no buy/sell agreement in place, the principal’s estate can end up with both the proceeds from the insurance policy and the ownership of the business.


Cross ownership
  • Each of the principals owns the policy on each one of the other principals.

  • This arrangement is extremely difficult to maintain if the business changes principals regularly.

  • There may be capital gains tax implications in the event the proceeds of a TPD or Trauma policy are received by someone other than the insured or a relative of the insured.

  • Policies that are cross-owned are not usually transportable.

Company ownership
  • The company owns the policy for each principal. 

  • The costs of the premiums are not tax deductible. 

  • The proceeds of total and permanent disability or trauma cover will be subject to capital gains tax.  To arrive at an appropriate sum insured you should take into account the impact capital gains tax will have on the payout.  The grossed up insured amount results in an increase in the cost of premiums and makes this type of ownership more expensive when compared to self ownership. 

  • As the company owns the insurance they will receive the payout in the event of a claim. 

  • Care needs to be taken to determine how the payout will be released from the company and forwarded to the appropriate beneficiary.

Insurance trust ownership
  • This can be effective to manage administration where there are a large number of share holders/partners and/or frequent changes in the ownership are expected. 

  • The trust owns the policies and when a new business owner joins the company the trust purchases a new policy on that person’s life. 

  • If a death or disability occurs to one of the principals, the policy proceeds are paid to the trust. The trustees can then distribute the policy proceeds to the principals as stated in the trust rules. 

  • For trauma and TPD, any insurance payout may be subject to capital gains tax, as a third party is holding the insurance. This is dependent on the type of trust structure in which the policies are held. 

  • Capital gains tax should be factored into the valuation amount so that there is no shortfall in the amount required to cover the purchase price. 

  • This structure has considerable set up and ongoing costs as well as compliance and taxation issues.  However, it provides flexibility if there are changes in the business structure.

  • The payout procedure is a simple process through the trustee and any life insurance payout will not incur capital gains tax.

Self ownership

Other thing to consider


Having a succession plan is an important part of every business.  Ensuring that your business succession plan is structure correctly for your situation is just as important as having a plan in the first place. 


It needs to take into consideration not only the business conditions, but the individual circumstances and future goals of each business partner and their family. 


Even the best laid plans can have serious consequences if they are not correctly structured using specialists in this area. 


We are happy to help you with your business succession planning.


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